Question

Barbour Corporation, located in Buffalo, New York, is a retailer of hightech products and is known for its excellent quality and innovation. Recently the firm conducted a relevant cost analysis of one of its product that has only two products, T-1 and T-2. The sales for T-2 are decreasing and the purchase costs are increasing. The firm might drop T-2 and sell only T-1. Barbour allocates fixed costs to products on the basis of sales revenue. When the president of Barbour saw the income statement, he agreed that T-2 should be dropped. If this is done, sales of T-1 are expected to increase by 10% next year; the firm’s cost structure will remain the same. T-1 T-2 Sales $ 280,000 $ 324,000 Variable cost of goods sold 86,000 162,000 Contribution margin $ 194,000 $ 162,000 Expenses: Fixed corporate costs 76,000 91,000 Variable selling and administration 12,000 66,000 Fixed selling and administration 28,000 37,000 Total expenses $ 116,000 $ 194,000 Operating income $ 78,000 $ (32,000) Required: 1. Find the expected change in annual operating income by dropping T-2 and selling only T-1. Net loss on discontinuing T-2 $ 49,400 2. By what percentage would sales from T-1 have to increase in order to make up the financial loss from dropping T-2? (Enter your answer as a percentage rounded to 2 decimal places (i.e. 0.1234 should be entered as 12.34).) Required % increase in sales of T-1 % 3. What is the required percentage increase in sales from T-1 to compensate for lost margin from T-2, if total fixed costs can be reduced by $52,500? (Enter your answer as a percentage rounded to 2 decimal places (i.e. 0.1234 should be entered as 12.34).) Required % increase in sales from T-1 %

Answer 1

1)
	T-1	T-2
Sales	$280,000.00	$324,000.00
Variable costs of goods sold + Variable Selling administration	$98,000.00	$228,000.00
Contribution margin	$182,000.00	$96,000.00
Contribution margin Ratio = CM/sales	65.00%	29.63%
Incremental contribution margin from T1 if drop T2 = $182,000 x 10%	$18,200.00
Expected change in annual operating income = $18,200 - 96000	-$77,800.00
Net loss discontinuing	-$77,800.00
2)
Loss of CM, T-2= Gain in CM
$96000 = X% x $182000
X% = $96000/$182000	52.75%
3)
Loss of CM, T-2= Gain in CM
$96000 - $52500 = X % x $182000
X% = 43500/$182000	23.90%